Life is full of specialists, people who spend their careers studying one subject. I agree with Heinlein; specialization is for insects.
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Wednesday, January 13, 2010

In the past few days, there’s been a couple of stories floating an idea by the Treasury Department to encourage people with 401(k) accounts to switch their investing out of securities (stocks, bonds, etc.) and into annuities:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

The purported reason for this is to ensure that those who plan to depend on their 401(k)s for the bulk of their retirement income will have a sufficient income stream, with the excuse given that investors lost an average of 31% of the value of their 401(k) accounts between January 2008 and March 2009. What is hidden in the story is the fact that these accounts recovered half of that loss in the past nine months, and at the current rate of growth in the stock market the average 401(k) will be back at January 2008 levels in another nine months. So, where is the crisis? What is the real reason?

I think the real reason is clear; the Obama Administration has an eye on all of that money and wants to grab it. Obviously, outright confiscation would result in an armed uprising by outraged Americans. However, what if the Congress pulled an Argentina and changed the 401(k) laws to force conversions of all of the funds in 401(k)s to government-backed annuities… T-bills… or face a confiscatory tax rate? Yes, there’d be a court battle that would drag on for years, and that might or might not be won by taxpayers, but in the meantime the government has all of that money. And what would they do with it?

Today, our budget deficits are funded by taking the surplus funds out of Social Security, and selling T-bills. The Social Security surplus is drying up as the number of retired recipients is approaching the number of working contributors. Buyers of our T-bills are similarly drying up; it’s a lot easier to sell a couple hundred billion dollars worth of T-bills each year than to sell more than a trillion dollars worth of T-bills each year… and as the economy falters and we buy less imported oil and Asian-manufactured goods the Arabs, Japanese, and Chinese have less dollars to buy our T-bills. More important, the Chinese, who are the largest purchasers of T-bills, have us over a barrel. They can use the threat of not buying our debt as a strategic lever against us. Certainly our economy would collapse if we were forced to either stop all deficit spending or print more than a trillion dollars to buy next year’s debt. As China’s domestic consumption grows, they need our markets less and less… and we’ve already funded much of their economic development. What if they decide to annex Taiwan, and they use the threat of cutting off purchasing our debt if we interfere? Will the Obama Administration risk economic collapse over Taiwan? I don’t know if the Chinese are willing to push us that far, but certainly we’re fools if we expect them to continue to buy our debt when our ability to repay that debt is becoming increasingly doubtful. So the Obama Administration and the Congressional Democrats have come up with an alternative, a Plan B, to take all of the money in our 401(k) accounts.

A prudent nation would forego more government spending than it collects in taxes. Prudent and Congress are two words that are seldom if ever found in the same sentence, however. The current Congress seems hell-bent on spending every dime they can get their hands on, and borrowing even more money to spend once that is gone. The current Administration will not stop them. Changing the law to put another $3.6 trillion in the hands of the Congressional spendthrifts and postponing the hard decisions about government spending for another couple of elections is the easy way out, especially if enough people buy the spin about how this is somehow looking after their best interests.

This is how a once-great country sinks into economic purgatory. This is how America, the strongest nation the world has ever known, with the largest economy and the highest standard of living, turns into a banana republic. Be afraid. Be very afraid. (HT: Instapundit)